We believe that investors are still too complacent about the sustainability of company profits in the less favourable economic conditions that will surely come, in spite of the wake-up call sounded by recent stockmarket volatility. Our caution is reflected in our stock selection. The top three shares: MTN, Remgro (whose major asset is a stake in British American Tobacco) and SABMiller share some similar characteristics: relatively stable (non-cyclical) demand for their products, strong competitive advantages, global diversification and surprisingly strong growth prospects. While we are excited about the business prospects for MTN, SAB and BAT; it must be said that the shares are not outstanding bargains as they all trade at more than 15 times forward earnings. But then it is rare to find outstanding bargains when a stockmarket is up four times, and we encourage our clients to temper their return expectations.

We believe that investors are still too complacent about the sustainability of company profits in the less favourable economic conditions that will surely come, in spite of the wake-up call sounded by recent stockmarket volatility. Our caution is reflected in our stock selection. The top three shares: MTN, Remgro (whose major asset is a stake in British American Tobacco) and SABMiller share some similar characteristics: relatively stable (non-cyclical) demand for their products, strong competitive advantages, global diversification and surprisingly strong growth prospects. While we are excited about the business prospects for MTN, SAB and BAT; it must be said that the shares are not outstanding bargains as they all trade at more than 15 times forward earnings. But then it is rare to find outstanding bargains when a stockmarket is up four times, and we encourage our clients to temper their return expectations.

We continued to trim back the net equity exposure of the Fund, and by month-end it stood at 68.1% (58.9% domestic and 9.2% offshore). We are constantly evaluating the attractiveness of equities, not only relative to each other, but also relative to the other major investable asset classes such as property, commodities, bonds, cash and Hedged Equities. The allocation to Hedged Equities has been growing over the year. An investment in Hedged Equities is created by the Fund retaining ownership of its existing equities and then selling ALSI futures contracts, which trade on the JSE's SAFEX market. The futures contracts pay out cash to the seller if the value of the ALSI falls, and thus 'hedge' the risk of a fall in the overall stockmarket. We expect hedged equities to return money market returns plus the out- (or minus the under-) performance of our equities versus the ALSI. This allows the Fund to reduce equity exposure, while remaining exposed to our stockpicking skills.

The ALSI reached a record 30,000 points during July - a fourfold increase over four years! We believe that the market is too complacent regarding the sustainability of company profits in the less favourable economic conditions that will surely come. Our caution is reflected not only in a further reduction in the Fund's net equity exposure to 63.2%, but also in our stock selection. The top three shares: MTN, Remgro (whose major asset is a stake in British American Tobacco) and SABMiller share some similar characteristics: relatively stable (non-cyclical) demand for their products, strong competitive advantages, global diversification and surprisingly strong growth prospects. While we are excited about the business prospects for MTN, SAB and BAT; it must be said that the shares are not outstanding bargains as they all trade at more than 15 times forward earnings. But then it is rare to find outstanding bargains when a stock market is up four times, and we encourage our clients to temper their return expectations

We believe that investors are still too complacent about the sustainability of company profits in the less favourable economic conditions that will surely come, despite the wake-up call sounded by the recent stock market volatility. Our caution is reflected not only in a further reduction in the Fund's net equity exposure to 61.0%, but also in our stock selection. The top three shares: MTN, Remgro (whose major asset is a stake in British American Tobacco) and SABMiller share some similar characteristics: relatively stable (non-cyclical) demand for their products, strong competitive advantages, global diversification and surprisingly strong growth prospects. While we are excited about the business prospects for MTN, SAB and BAT; it must be said that the shares are not outstanding bargains as they all trade at more than 15 times forward earnings. But then it is rare to find outstanding bargains when a stockmarket is up four times, and we encourage our clients to temper their return expectations.

The South African share market continued to make new highs in April. The volatility of the stockmarket will be reflected in the returns of the Fund as the major portion of the Balanced Fund is invested in equities. But volatility should be less than that of the Equity Fund. Unfortunately we are not able to predict future stockmarket movements. The net SA equity exposure of the Fund (63.9%) is not a result of a strategic asset allocation decision, but is rather the result of assessing the potential long-term returns of each share in the portfolio versus the potential long-term returns of property, bonds and the money market. It will be more difficult for equities to outperform alternative asset classes from today's starting point, because of the current high level of share prices. Nonetheless we remain confident that the shares in the Fund will deliver superior returns in the long-term, albeit with more volatility than the money market.

Over May we trimmed back the net equity exposure of the Fund to 71% (61.7% domestic and 9.3% offshore). We are constantly evaluating the attractiveness of equities, not only relative to each other, but also relative to the other major investable asset classes such as property, commodities, bonds, cash and Hedged Equities. The allocation to Hedged Equities has been growing over the year. An investment in Hedged Equities can be created by the Fund retaining ownership of its existing equities and then selling ALSI futures contracts, which trade on the JSE's SAFEX market. The futures contracts pay out cash to the seller if the value of the ALSI falls, and thus 'hedge' out the risk to shareholders of a fall in the overall stockmarket. We expect hedged equities to return money market returns plus the out- (or minus the under-) performance of our equities versus the ALSI. This allows the Fund to reduce equity exposure, while remaining exposed to our stockpicking skills

The South African share market has rebounded to new highs since the writing of the last fact sheet. The volatility of the share market will be reflected in the returns of the Fund as the major portion of the Balanced Fund is invested in equities. But volatility should be less that that of the Equity Fund. Unfortunately we are not able to predict future stock market movements. The net SA equity exposure of the Fund (63.7%) is not a result of a strategic asset allocation decision, but is rather the result of assessing the potential long-term returns of each share in the portfolio versus the potential long-term returns of property, bonds and the money market. It will be more difficult for equities to out-perform alternative asset classes from today's starting point, because of the current high level of share prices. Nonetheless we remain confident that the shares in the Fund will deliver superior returns in the long term, albeit with more volatility than the money market.

The sharp 7.5% correction in the South African share market around the February month-end serves as a reminder to investors that share prices move both up and down. The major portion of the Balanced Fund is invested in equities, which means that the fund's returns will exhibit some volatility, although not as much as the Equity Fund. Unfortunately we are not able to predict future stock market movements. The net SA equity exposure of the Fund (63%) is not a result of a strategic asset allocation decision, but is rather the result of assessing the potential long-term returns of each share in the portfolio versus the potential long-term returns of property, bonds and the money market. It will be more difficult for equities to out-perform alternative asset classes from today's starting point, because of the current high level of share prices. Nonetheless we remain confident that the shares in the Fund will deliver superior returns in the long term, albeit with more volatility than the money market.

Fund returns over the latest 1, 3 and 5-year periods are all over 25% p.a. in comparison with current inflation measures around 5% p.a. Long-term investors in the Fund are understandably overjoyed by these historic returns. However, we caution investors not to extrapolate returns of this magnitude for the next 5 years. There are a number of risks to future returns from South African assets:

-South African companies are very profitable in comparison with their global peers and their earnings are above trend-line.

-South African companies are trading on P/E multiples that are high in relation to their own long-term history.

-Global investors are attaching historically low risk premiums to emerging market investments.

-South Africa continues to incur a significant deficit on the current account, which suggests that the Rand is unsustainably strong. The Fund is invested with these risks in mind, and we remain confident of the Fund's potential to outperform its benchmark over the long run.